Written Commentary
Price Overview
The petroleum complex came under sharp downside price pressure on concerns over China’s economic prospects. Reports that China’s factory activity expanded in July at the slowest pace since February of 2020 appeared to encourage selling interest. The slowdown in growth was attributed to higher raw material costs, equipment maintenance and extreme weather . The Manufacturing Purchasing Manager’s Index was reported at 50.4 in July from 50.9 in June. Of concern was the weakness in the index for new export orders at 47.7 which has dropped for over three months beginning in May. The market ignored a last week’s reported drone attack on an Israeli managed tanker off the coast of Oman by Iran and awaited the response by the US, Britain and Israel and any impact on the stalled JCPOA negotiations. In the background as a bearish consideration were reports that OPEC July output had risen to 610 tbd to 26.72 mb/d. OPEC+ compliance level with the current agreement was reportedly at 115 percent in July compared to118 percent in June with the largest output rise attributed to Saudi Arabia and the UAE.
The market focus will remain on demand prospects and the impact of the Delta variant on curtailing mobility and economic activity. In addition, the drawdown in US inventories and disappearance will also be monitored in the DOE report. Current estimates forecast inventories falling in crude by 2.9 mb, gasoline stocks are expected -1.4 mb and distillate is expected -.2 mb. Refinery utilisation is expected to have increased by +.8 percent from 91.1 percent last week.
For now we still see the uncertain demand outlook offset by the prospect that stocks will decline into the end of the year should help confine values in a trading range of 70.00 to 77.00 range until a clearer fundamental picture emerges. Fresh fiscal stimulus and the appearance that additional measures to encourage vaccines will be enacted should maintain support at the lower ranges.
Natural Gas
The Nat Gas traded in a firm fashion as forecasts point to hotter weather over the coming weeks than previously expected. Prospects that US demand will rise to 95.2 bcf/d next week from 91.2 bcf/d this week appeared to encourage buying interest. In the background remain strong export levels for LNG as US production levels remain limited at 92.2 bcf/d. The market continues to have strong tailwinds as international prices remain firm and exports to Asia and particulalry China remain at record levels. The IEA forecast that demand worldwide this year will rise by 3.6 percent worldwide paced by China and will average 1.7 percent growth from 2022-2024. A move through the recent highs at 4.165 could signal a test of the 4.40 level.
Charts Courtesy of DTN Prophet X, EIA, Reuters
The authors of this piece do currently maintain positions in the commodities mentioned within this report.
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